Live Chat: WSJ’s David Wessel on the Global Impact of the Japanese Disaster

The triple hit Japan has taken – earthquake, tsunami and nuclear crisis – has stressed one of the world’s largest economies. Supply chains have been severed in many industries—25% of world capacity to make silicon chips is down—and demand from Japan’s consumers and businesses is depressed. How will these repercussions play out? How can governments minimize the harm? Wall Street Journal economics editor David Wessel analyzed the situation in a live chat with readers on March 25. Phil Izzo, editor of the Real Time Economics blog, moderated. Replay the event.

Full transcript follows
5:39 Journal Community:
Thanks for tuning in. Please ask your question in the box below and David Wessel will get to as many as possible when the chat begins at 1:30 Friday.

Friday March 25, 2011
1:29 Phil Izzo:
Hi everyone, welcome. We’ll be talking today with Journal economics editor David Wessel on the economic effects of the crisis in Japan.

1:29 david:
Hi. Ready to start fielding questions, and answering at least some of them.

1:30 Phil Izzo:
Let’s start with one that has come up from a few people.

1:30 Comment From tshepo
since japan is one of the largest economies,and does affect us somehow,should we expect the world to go back to 2009 situation

1:31 david:
Japan, tho surpassed by China, is still the No. 3 economy in the world — bigger than Britain and France combined. It has taken a hit, and will be consuming less for the foreseeable future. That’s a negative for world growth…

1:31 david:
…but we’re also learning just how vital Japan is to the global supply chain. In the WSJ today is a story about how Ford says it won’t take orders for black cars now. The pigment is made in Japan and is unavailable.

1:32 Phil Izzo:
Here’s another on Japan’s manufacturing sector

1:32 Comment From Fred G.
How long will it take before Japan will return to its pre-earthquake production levels for chips and electronics?

1:34 david:
Hard to know for sure. And that’s a major source of uncertainty…

1:36 david:
…some plants were damaged and won’t be restored soon. Others are suffering from an acute shortage of electricity that will take time to cure. But others — the ones that weren’t damaged but have suspended work because they don’t have key supplies — will come on line again as soon as they find alternative sources of supply. How long it takes to resume chip production from Japan will determine how big a blow this is to the world economy.

1:38 David Wessel:
Two good questions. (1) On manufacturing demand/capacity shifting to the US? Unlikely because we don’t make all that much of the stuff that Japan makes anymore. South Korea, Germany likely to benefit more. (2) On inflation…

1:39 David Wessel:
as I wrote in my Capital column this week http://wsj.com/capital there are economic crosswinds. One is less demand, that lessens inflationary pressures….

1:40 David Wessel:
The other is disruption of supply, that increases inflationary pressures. We don’t really know yet which will prevail. All this comes, of course, at a time of higher oil prices, which is definitely an inflationary worry, as well as increases in food prices (caused by the weather for the most part)

1:40 Phil Izzo:
Here’s one for currency watchers

1:40 Comment From Martin
In the past week we saw a sudden jump in Yen vs USD. Now that G7 has decided to stabilize the currency, what will be the current FX trend in regard to Yen ?

1:40 David Wessel:
Ah a very good question.

1:41 David Wessel:
It seemed weird that Japan gets shaken up (pun intended) and its currency RISES. Why? Well, either because Japanese institutions and households with money overseas are bringing it home, or because speculators expect they’ll do so. Selling dollars, euro, etc., to bring money home, of course, means buying yen and that pushes up the yen’s value.

1:42 David Wessel:
That worried the Japanese government, which asked for help from the US, Europe.

1:43 David Wessel:
And everyone joined together to SELL yen, which succeeded in arresting its rise. Most economists to whom I speak, though, expect that over time this episode is bad for the yen…and it’ll eventually begin to fall. But they’re not very good at predicting FX markets.

1:43 Phil Izzo:
Moving from currencies to stocks

1:43 Comment From Joe
The stock markets are bouncing back and nearing new highs. Could the effects from the Japan earthquake be dismissed this easily?

1:44 David Wessel:
I think there’s a sense of relief that we don’t have a worse nuclear disaster in Japan, and that is helping markets. A lot turns now on what happens in the Middle East with oil…probably a bigger factor in world economy and stock markets than Japan. #

1:44 Phil Izzo:
A lot of questions coming in on how and whether reconstruction will boost growth,

1:45 Phil Izzo:
I think that dovetails with this question

1:45 Comment From Chris
Is there any outward signs that Japan implemented proactive measures to mitigate any portion of the impact that an event of this magnitude this would have on their economy?

1:46 David Wessel:
Pre-emptive measures? No. No one planned for a quake of this magnitude. But the Bank of Japan did respond very quickly to try to cushion the Japanese economy from the severe blow.

1:46 Phil Izzo:
Here’s another about structural problems facing Japan

1:46 Comment From DavidJ
Is Japan’s demographic problem likely to exacerbate due to the disaster, and if so, what impact will that have on the recovery?

1:47 David Wessel:
Japan’s shrinking population and the growing fraction of its population that is elderly was an economic issue before the quake. Its resistance to immigration compounded the economic threat. When I was in Japan a few months ago, I was struck by the sense that many Japanese young people had lost their ambition and self-confidence. …

1:48 David Wessel:
That will make it harder for Japan to rebound from this disaster. But perhaps it can galvanize Japan to do what it needs to do to maintain and raise living standards….

1:49 David Wessel:
…One big issue, I think, is that Japan has a huge debt. And fewer workers to pay taxes to pay off that debt. And the debt is going to get bigger to pay the reconstruction tab.#

1:49 Phil Izzo:
Though Japan is still dealing with the immediate effects of the crisis, the rebuilding effort will have to start eventually.

1:49 Comment From Jimmy G
I have read some articles that this crisis may in fact turn out to be a positive for Japan via the rebuilding effort, any thoughts on this?

1:49 David Wessel:
I’ve read those too. I don’t buy this….

1:50 David Wessel:
… It is true that reconstruction increases GDP. But that’s an accounting fiction. GDP doesn’t reflect the damage done to lives, property, whole communities by the earthquake. If this were good for growth, then national governments would blow up one city a month and rebuilt it.#

1:50 Phil Izzo:
Lots of questions about what this means for the oil market

1:50 Comment From Phil C.
What is the net effect on global oil consumption for the next 6 – 12 months? more Japanese consumption for electricity vs. less manufacturing and other production due to constricted supply chains?

1:52 David Wessel:
Net effect in near term, I think, is a decreased demand for oil from Japan because economic activity has decreased. Longer term, it must mean an increase in demand for oil and for LNG (liquified natural gas) to replace lost nuclear capacity. Of course, oil prices right now are up not because demand is strong but because of fears about the reliability of supply from the Middle East.#

1:52 Phil Izzo:
In case you missed it check out today’s story on the effects on business http://online.wsj.com/article/SB10001424052748704461304576216950927404360.html

1:52 Phil Izzo:
Looking at the effects close to home

1:52 Comment From Zack
As a key US trading partner, notwithstanding the parts supply issue, in what other ways will a reduction of Japanese GDP affect US GDP?

1:55 David Wessel:
1) Disruption of supply chain, to which you refer.
2) Japan is still a big economy. It will buy less for a while. Tiffany, Abode and others are warning they’ll sell less in Japan, and that hurts US exports to Japan.
3) If Japan’s problems hurt other countries’ exports, too, say other Asian countries, that could hurt global growth. And the US economy is counting more than ever on the rest of the world to pull us out of the recessionary ditch.
4) Ripple effects on financial markets could affect US GDP. Right now the markets seem to be calmer, though. But that could change if things take a turn for the worse in Japan. Stock markets are lower, though, than they were before the quake.
5) If Japan brings a lot of money home, that means lending less to the U.S. and that means at some point higher interest rates here.#

1:55 Phil Izzo:
John asks about the food industry, check out some stats on what Japan is exporting here http://blogs.wsj.com/economics/2011/03/25/made-in-japan-what-is-country-exporting/

1:55 Comment From john w
what impact will this have on the food industry.

1:56 David Wessel:
Some, but not much. Japan will import more food, and will export less food. But it doesn’t do a whole lot of either. Food prices are much more influenced by the size of harvests around the world and, of course, by the growing appetites of consumers in China, India and other emerging markets.#

1:57 Phil Izzo:
Shifting to the nuclear issue

1:57 Comment From Richardoe
In a recent report from our government, they found 24 incidents or problems had not been reported as required regarding nuclear power plants by there plant operators. Some of them stated they didn’t know they had to report them. No matter how safe they are made, how do you account for human mistakes or errors? If a human screws up it could be catastrophic, or if nature does its thing as in Japan. the human factor is the one unaccountable error that will always be the achilles heel that is so deadly.

1:59 David Wessel:
This episode has underscored the risks of nuclear power, particularly the risks of nuclear plants located on fault lines and the problems with keeping spent fuel on the same site as the nuke plants. I’m no expert on nuclear safety, and I know these Japanese plants were old ones. But it is surely the case that neither the US nor other industrialized countries will be building a lot of new nuclear plants soon. That means relying on other sources of power, some of which may be worse for climate change than nukes would have been. As we learned from the oil spill in the Gulf of Mexico, though, there are risks to other forms of energy too.#

1:59 Phil Izzo:
More on the effects for the U.S. and the Fed in particular

1:59 Comment From Manik
A follow-up on Jimmy G’s query.. Japan is the second largest holder of US debt after China and they also substantial assets in US and elsewhere. DO you think they will be liquidating those faster to boost growth? What ripple effects, if any, it may have on Fed’s policy.

2:01 David Wessel:
Right now Japan doesn’t appear to be selling its Treasury hoard or having a big influence on U.S. interest rates. As I said earlier, though, if Japan lends less to the US over time, then either the US needs to save more or interest rates here will go up. As for the Fed, I don’t think this is going to make much difference one way or another. It’s one of a dozen factors influencing the global outlook, but not the biggest one#

2:01 Phil Izzo:
Here another focused on the U.S.

2:01 Comment From Dylan
Will the shortages seen in the supply chain force geographical diversification, or possible shift jobs to the US?

2:03 David Wessel:
Good question. I suspect that businesses in general will look to diversify sources of supply, build their inventories a bit and think about shortening supply chains (i.e. building closer to home.) It should have some positive impact on US jobs, but not much — except in the few industries where we are tough competitors to Japan, e.g. earth-moving equipt.

2:03 Phil Izzo:
Here’s a question on timing

2:03Comment From bm
Isn’t the real question we should be dealing with is how long will it take for the economy in Japan to recover from this? Apparently the markets are telling us this will not take long? What is your opinion?

2:05 David Wessel:
The markets are reflecting information at the moment, but the past 10 days have taught us how quickly information can change…

2:05 Phil Izzo:
On the nuclear issue, check out this Journal story http://online.wsj.com/article/SB10001424052748703362904576218980605067662.html

2:05 David Wessel:
…My gut is that the economic effects of this will be bigger and longer lasting that the conventional wisdom among economists. But I don’t have a lot of evidence for that. As for the stock market…

2:06 David Wessel:
…I don’t predict what it’ll do. If I could do that, I’d be on the beach now and not typing on this keyboard. #

2:06 Phil Izzo:
More on Japan’s power problems

2:06 Comment From Jeff Roberts
How will they replace the lost power from the Nuclear Plants, short term, and long term?

2:07 Phil Izzo:
I think we’ll have time for one more question after this one.

2:08 David Wessel:
Short term: Right now they have rolling blackouts and they are likely to persist. Presumably all other generators are going to be working overtime now. Long term, either get other nukes operating more or build new gas-fired generators (the quickest to build.) Suspect they’ll import power generation equiptment. Of course, there’s also the chore of rebuilding the electricity grid.

2:08 Phil Izzo:
Ok, last one is a political-economy question

2:08 Comment From Jimmy G
Do you think there is any risk of political tension between Japan and the US, with the US being the first country to warn overseas citizens in Japan to return home as well as the first country to place bans on Japanese food imports? If so, what risk does this pose to our economy.

2:10 David Wessel:
Oh, I think that was a moment of embarrassment and tension between the US govt and the Japanese govt, but I don’t think it’ll have lasting effects. I assume the help they’re getting from the US military and other Americans will have a bigger effect. But mainly, I sense the Japanese are preoccupied with their own severe problems — and not worrying about what the US is doing, not doing or saying. #

2:10 Phil Izzo:
Well, that wraps it up. Thanks to David for taking the time to chat with us.

2:10 David Wessel:
Thanks for the good questions. Keep reading The Wall Street Journal — esp the reports from our intrepid Japanese bureau.

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